Question

The operations of Jorge Corporation are divided into the Northern Division and the Eastern Division. Projections for the next year are as follows:

	Northern Division				Eastern Division				Total
Sales	$	750,000			$	540,000			$	1,290,000
Less: Variable costs		270,000				300,000				570,000
Contribution margin	$	480,000			$	240,000			$	720,000
Less: Direct fixed costs		225,000				190,000				415,000
Segment margin	$	255,000			$	50,000			$	305,000
Less: Allocated common costs		130,000				95,000				225,000
Operating income (loss)	$	125,000			$	(45,000	)		$	80,000

Required:

a. Operating income for Jorge Corporation, as a whole, if the Eastern Division were dropped would be:
b. If Eastern Division is dropped, Northern's sales will increase by 20%. What will Jorge Corporation's operating income be?

Answer 1

(a) Operating income for Jorge Corporation, as a whole, if the Eastern Division were dropped would be:

$125000 - $95000 = $30000

Because when we are assuming that Eastern Division is dropped so it’s the common cost allocated to it should be subtracted from the income of Northern division.

(b) Jorge Corporation's operating income

Particular	Amount
Sales	$                                    750,000
Less: Variable costs	$                                    270,000
Contribution margin	$                                    576,000
Less: Direct fixed costs	$                                    225,000
Segment margin	$                                    351,000
Less: Allocated common costs	$                                    225,000
Operating income	$                                    126,000

If Northern divisions sales will increase by 20% then we increase its contribution margin by 20%

And total allocated common cost (i.e.Allocated common cost of Northern + eastern divisions ) will be subtracted here